Kentucky sales tax guide

Sales tax is a tax paid to a governing body (state or local) on the sale of certain goods and services. Kentucky first adopted a general state sales tax in 1960, and since that time, the rate has risen to 6 percent. In many states, localities are able to impose local sales taxes on top of the state sales tax. However, as of June 2019, there are no local sales taxes in Kentucky.

As a business owner selling taxable goods or services, you act as an agent of the state of Kentucky by collecting tax from purchasers and passing it along to the appropriate tax authority. Sales and use tax in Kentucky is administered by the Kentucky Department of Revenue (Kentucky DOR).

Any sales tax collected from customers belongs to the state of Kentucky, not you. It’s your responsibility to manage the taxes you collect to remain in compliance with state and local laws. Failure to do so can lead to penalties and interest charges.

In Kentucky, sales tax is levied on the sale of tangible goods and some services. The tax is collected by the seller and remitted to state tax authorities. The seller acts as a de facto collector.

To help you determine whether you need to collect sales tax in Kentucky, start by answering these three questions:

1. Do you have nexus in Kentucky?
2. Are you selling taxable goods or services to Kentucky residents?
3. Are your buyers required to pay sales tax?

If the answer to all three questions is yes, you’re required to register with the state tax authority, collect the correct amount of sales tax per sale, file returns, and remit to the state.

If you meet the criteria for collecting sales tax and choose not to, you’ll be held responsible for the tax due, plus applicable penalties and interest.

It’s extremely important to set up tax collection at the point of sale — it’s near impossible to collect sales tax from customers after a transaction is complete.

The need to collect sales tax in Kentucky is predicated on having a significant connection with the state. This is a concept known as nexus. Nexus is a Latin word that means "to bind or tie," and it’s the deciding factor for whether the state has the legal authority to require your business to collect, file, and remit sales tax.

Sales tax nexus in all states used to be limited to physical presence: A state could require a business to register and collect and remit sales tax only if it had a physical presence in the state, such as employees or an office, retail store, or warehouse.

In June 2018, the Supreme Court of the United States overruled the physical presence rule with its decision in South Dakota v. Wayfair, Inc. States are now free to tax businesses based on their economic and virtual connections to the state, or economic nexus.

While physical presence still triggers a sales tax collection obligation in Kentucky, it’s now possible for out-of-state sellers to have sales tax nexus with Kentucky.

Out-of-state sellers with no physical presence in a state may establish sales tax nexus in the following ways:

Affiliate nexus: Having ties to businesses or affiliates in Kentucky. This includes, but isn’t limited to, the design and development of tangible personal property (goods) sold by the remote retailer, or solicitation of sales of goods on behalf of the retailer.

Economic nexus: Having a certain amount of economic activity in the state. For sales made on and after October 2018, a remote seller must register with the state then collect and remit Kentucky sales tax if the remote seller meets either of the following criteria (the economic thresholds):

• Gross receipts from sales into the state of $100,000 or more; or
• 200 or more separate retail transactions into the state in the current or previous calendar year

Inventory in the state: Storing property for sale in the state. This includes merchandise owned by Fulfillment by Amazon (FBA) merchants and stored in Kentucky in a warehouse owned or operated by Amazon.

Marketplace sales: Making sales through a marketplace. Effective July 2019, marketplace facilitators are responsible for collecting and remitting sales tax on behalf of marketplace sellers in Kentucky.

Read about Kentucky House Bill 487 and House Bill 354 for more information.

The Kentucky Department of Revenue requires non-collecting sellers to notify customers about their potential use tax liability, provide customers with an annual purchase summary, and provide the state with a customer information report. The precise nature of these requirements varies from state to state; for more state-specific information, see the Kentucky DOR Division of Sales and Use Tax official correspondence on this subject.

Non-collecting seller use tax reporting in Kentucky is repealed effective July 1, 2019.

Sales tax nexus can linger even after a retailer ceases the activities that caused it to be “engaged in business” in the state. This is known as trailing nexus. As of June 2019, Kentucky does not have an explicitly defined trailing nexus policy.

If you’re an active Amazon seller and you use Fulfillment by Amazon (FBA), you need to know where your inventory is stored and if its presence in a state will trigger nexus. FBA sellers can also download an Inventory Event Detail Report from Amazon Seller Central to identify inventory stored in Kentucky.

If you sell taxable goods to Kentucky residents and have inventory stored in the state, you likely have nexus and an obligation to collect and remit tax. To begin to understand your unique nexus obligations, check out our free economic nexus tool or consult with a trusted tax advisor.

In some states, sales tax rates, rules, and regulations are based on the location of the seller and the origin of the sale (origin-based sourcing). In others, sales tax is based on the location of the buyer and the destination of the sale (destination-based sourcing).

Kentucky is a destination-based state. This means you’re responsible for applying the sales tax rate determined by the ship-to address on all taxable sales.

After determining you have sales tax nexus in Kentucky, you need to register with the proper state authority and collect, file, and remit sales tax to the state. We get a lot of questions about this and recognize it may be the most difficult hurdle for businesses to overcome. Avalara Licensing can help you obtain your Kentucky business license and sales tax registration.

You can register for a Kentucky tax account online through the Kentucky DOR. To apply, you’ll need to provide the Kentucky DOR with certain information about your business, including but not limited to:

• Business name, address, and contact information
• Federal EIN number
• Date business activities began or will begin
• Projected monthly sales
• Projected monthly taxable sales
• Products to be sold

There is currently no cost to register for a tax account in Kentucky.

You must register with the Kentucky Department of Revenue if you acquire an existing business in Kentucky. The state requires all registered businesses to have the current business owner’s name and contact information on file.

The Streamlined Sales and Use Tax Agreement (SSUTA), or Streamlined Sales Tax (SST), is an effort by multiple states to simplify the administration and cost of sales and use tax for remote sellers. Remote sellers can register in multiple states at the same time through the Streamlined Sales Tax Registration System (SSTRS).

Kentucky became a full member of the SST on October 1, 2005.

Once you've successfully registered to collect Kentucky sales tax, you'll need to apply the correct rate to all taxable sales, remit sales tax, file timely returns with the Kentucky Department of Revenue, and keep excellent records. Here’s what you need to know to keep everything organized and in check.

How you collect Kentucky sales tax is influenced by how you sell your goods:

Brick-and-mortar store: Have a physical store? Brick-and-mortar point-of-sale solutions allow users to set the sales tax rate associated with the store location. New tax groups can then be created to allow for specific product tax rules.

Hosted store: Hosted store solutions like Shopify and Squarespace offer integrated sales tax rate determination and collection. Hosted stores offer sellers a dashboard environment where Kentucky sales tax collection can be managed.

Marketplace: Marketplaces like Amazon and Etsy offer integrated sales tax rate determination and collection, usually for a fee. As with hosted stores, you can set things up from your seller dashboard and let your marketplace provider do most of the heavy lifting.

Mobile point of sale: Mobile point-of-sale systems like Square rely on GPS to determine sale location. The appropriate tax rate is then determined and applied to the order. Specific tax rules can be set within the system to allow for specific product tax rules.

Kentucky sales tax collection can be automated to make your life much easier. Avalara AvaTax seamlessly integrates with the business systems you already use to deliver sales and use tax calculations in real time.

Some goods are exempt from sales tax under Kentucky law. Examples include groceries, prescription drugs, and some manufacturing equipment.

We recommend businesses review the Exemptions section of the laws and rules put forth by the Kentucky General Assembly to stay up to date on which goods are taxable and which are exempt, and under what conditions.

Some customers are exempt from paying sales tax under Kentucky law. Examples include government agencies, some nonprofit organizations, and merchants purchasing goods for resale.

Sellers are required to collect a valid exemption or resale certificate from buyers to validate each exempt transaction.

Kentucky sales tax exemption and resale certificates are worth far more than the paper they’re written on. If you’re audited and cannot validate an exempt transaction, the Kentucky Department of Revenue may hold you responsible for the uncollected sales tax. In some cases, late fees and interest will be applied and can result in large, unexpected bills.

Sales tax holidays exempt specific products from sales and use tax for a limited period, usually a weekend or a week. Approximately 17 states offer sales tax holidays every year.

As of June 2019, however, there are no sales tax holidays in Kentucky.

You're registered with the Kentucky Department of Revenue and you've begun collecting sales tax. Remember, those tax dollars don't belong to you. As an agent of the state of Kentucky, your role is that of intermediary to transfer tax dollars from consumers to the tax authorities.

Once you’ve collected sales tax, you’re required to remit it to the Kentucky Department of Revenue by a certain date. The Kentucky Department of Revenue will then distribute it appropriately.

Filing a Kentucky sales tax return is a two-step process comprised of submitting the required sales data (filing a return) and remitting the collected tax dollars (if any) to the Kentucky DOR. The filing process forces you to detail your total sales in the state, the amount of sales tax collected, and the location of each sale.

Online filing is recommended. Kentucky sales and use tax return forms 51A102, 51A102E, 51A103, 51A103E, and 51A113 are not available online or by fax. The Kentucky DOR website lists the following options for filing sales and use tax returns:

• Electronic payment
• Tax Payment Solution (TPS)
• Sales and Use Tax Electronic Filing

Filers may also mail a check or money order made payable to "KY State Treasurer" to KY Department of Revenue, Frankfort, KY 40619

The Kentucky Department of Revenue will assign you a filing frequency. Typically, this is determined by the size or sales volume of your business. State governments generally ask larger businesses to file more frequently. See the filing due dates section for more information.

Kentucky sales tax returns and payments must be remitted at the same time; both have the same due date.

You may file directly with the Kentucky DOR by visiting their site and entering your transaction data manually. This is a free service, but preparing Kentucky sales tax returns can be time-consuming — especially for larger sellers.

To save time and avoid costly errors, many businesses outsource their sales and use tax filing to an accountant, bookkeeper, or sales tax automation company like Avalara. This is a normal business practice that can save business owners time and help them steer clear of costly mistakes due to inexperience and a lack of deep knowledge about Kentucky sales tax code.

Once you have a Kentucky seller's permit, you’re required to file returns at the completion of each assigned collection period regardless of whether any sales tax was collected. When no sales tax was collected, you must file a "zero return.”

Failure to submit a zero return can result in penalties and interest charges.

The Kentucky DOR requires all businesses to "close their books" by filing a final sales tax return. This also holds true for business owners selling or otherwise transferring ownership of their business.

Many states encourage the timely or early filing of sales and use tax returns with a timely filing discount.

As of June 2019, the Kentucky DOR offers 1.75 percent on the first $1,000 and 1.5 percent on the remainder up to a maximum of $50 per month.

It's important to know the due dates associated with the filing frequency assigned to your business by the Kentucky Department of Revenue. This way you'll be prepared and can plan accordingly. Failure to file by the assigned date can lead to late fines and interest charges.

The Kentucky DOR requires all sales tax filing to be completed by the 20th of the month following the tax period. For businesses with monthly sales and use tax liability of $10,000 or more, Kentucky DOR requires accelerated monthly filing, due by the 25th of the month of the current tax period.

Below, we've grouped Kentucky sales tax filing due dates by filing frequency for your convenience. Due dates falling on a weekend or holiday are adjusted to the following business day.

Filing a Kentucky sales tax return late may result in a late filing penalty as well as interest on any outstanding tax due. For more information, refer to our section on penalties and interest.

In the event a Kentucky sales tax filing deadline was missed due to circumstances beyond your control (e.g., weather, accident), the Kentucky DOR may grant you an extension. However, you may be asked to provide evidence supporting your claim.

Hopefully you don't need to worry about this section because you're filing and remitting Kentucky sales tax on time and without incident. However, in the real world, mistakes happen.

If you miss a sales tax filing deadline, follow the saying, “better late than never,” and file your return as soon as possible. Failure to file returns and remit collected tax on time may result in penalties and interest charges, and the longer you wait to file, the greater the penalty and the greater the interest.

If you’re in the process of acquiring a business, it’s strongly recommended that you contact the Kentucky DOR and inquire about the current status of the potential acquisition. Once you've purchased the business, you’ll be held responsible for all outstanding Kentucky sales and use tax liability.

If you’re collecting sales tax from Kentucky residents, you’ll need to consider how to handle taxes on shipping and handling charges.

Delivery charges by the retailer for preparation and delivery to a location designated by the purchaser are included in the sale price and are subject to tax if the sale is taxable, and exempt if the sale is exempt. However, delivery charges are generally exempt when charged by companies not in the business of selling tangible personal property.

There are exceptions to almost every rule with sales tax, and the same is true for shipping and handling charges. Specific questions on shipping in Kentucky and sales tax should be taken directly to a tax professional familiar with Kentucky tax laws.

For additional information, see Kentucky Sales Tax Facts.